Negligence — Valuation for bank loan — Residual valuation — Whether valuers negligent — Whether bank’s instructions followed
In reliance on
a valuation made by the defendant valuers of £3.5m, the plaintiffs lent £2.45m
to L Ltd in 1990, secured on property consisting of a disused factory.
Following the default of L Ltd, the property was sold in 1993 for £345,000. In
the court below judgment was given to the plaintiffs in the sum of £2.105m. The
defendants’ appeal against damages was dismissed on February 20 1995: see [1995]
1 EGLR 129. They continued their appeal against liability contending that if
they arrived at a figure within the range of figures that might be reported by
a valuer exercising reasonable skill and care, it did not matter that they may
have been negligent in carrying out the valuation.
that the defendants’ valuation of the property was outside the range of
valuation to which a reasonably competent valuer could properly come. There was
a danger in taking individual constituents of a residual land value in
isolation. There was evidence relating to final development values, interest
rates and other matters upon which the judge found that the defendants were
negligent. In breach of their letter of instructions the defendants failed to
inspect the interior of the property and notice the absence of a basement, and
therefore could not provide a proper commentary on the realism of developer’s
costs. Had the plaintiffs been informed of the absence of the basement, they
would not have made the loan.
The following
cases are referred to in this report.
Banque
Bruxelles Lambert SA v Eagle Star Insurance Co
Ltd [1995] 2 WLR 607; [1995] 1 EGLR 129; [1995] 12 EG 144, CA
Joyce v Yeomans [1981] 1 WLR 549; [1981] 2 All ER 21, CA
Lusiograin
Comercio International de Cereas Ltda v Bunge AG
[1986] 2 Lloyd’s Rep 654
Watt
(or Thomas) v Thomas [1947] AC 484; 63 TLR
314; [1947] 1 All ER 582
This was an
appeal by the defendants, Edward Erdman Group Ltd, against the decision of
Judge Byrt QC, who on October 1 1993 gave judgment to the plaintiffs, Nykredit
Mortgage Bank plc, in their claim for damages arising out of a valuation
provided by the defendants.
Michael de
Navarro QC and Jonathan Ferris (instructed by Williams Davies Meltzers)
appeared for the appellants; Michael Briggs QC and David Blayney (instructed by
Clifford Chance) represented the respondents.
Giving the
first judgment, Staughton LJ
said: The defendants are surveyors and valuers, the plaintiffs an English
company, now in Danish ownership, which lends money on mortgage. I shall call
them Erdman and Nykredit. In March 1990 a company, Lionhill Properties Ltd,
contemplated the purchase of a disused factory in Warple Way, East Acton,
London W3, for development purposes. They applied to Nykredit for a loan and
Nykredit instructed Erdman to make a valuation. The answer provided by Erdman
was £3.5m. Thereupon Nykredit lent 70% of that sum, £2.45m, to Lionhill, who
bought the property for £3.7m.
Within a few
months Lionhill were in default under the loan agreement. The proposed
development was never begun and the disused factory remains where it was to
this day. Receivers were appointed in September 1990. The property was
eventually sold in February 1993 for £345,000.
The story is
depressingly familiar. So perhaps, is the next step: Nykredit sued Erdman for
negligence and breach of contract in their valuation. The action came on for
trial before Judge Byrt QC, sitting as a deputy judge of the High Court, and
judgment was given on October 1 1993. The judge awarded Nykredit damages in the
sum of £2,105,000 and interest. It will be observed that the principal amount
was the difference between the sum of money lent (£2.45m) and the recovery on
sale (£345,000). But nobody says that the true value of the property in March
1990 was only £345,000; the market fell a great deal after that.
Erdman
appealed, as to both liability and damages. The appeal as to damages was joined
with others and came before Sir Thomas Bingham MR, Rose and Morritt LJJ, who
dismissed it*. (The first-named appellants were Banque Bruxelles Lambert SA.)
It was held that a fall in the market value of the property was foreseeable and
that Erdman’s liability in damages extended to the whole loss suffered by
Nykredit.
*Editor’s
note: Reported at [1995] 1 EGLR 129.
Somewhat
unusually, we have thereafter heard the appeal as to liability.
Further
facts
The site of
the disused factory and other buildings was bought in 1987 by William Sapcote
Developments Ltd for £3.1m. Part of it containing two buildings was sold in
March 1988. The purchasers refurbished one of the buildings as office
accommodation and began marketing it in separate units in January 1989. A year
later, when the valuation with which we are concerned was made, one-third of
the floorspace remained unsold. The purchasers also intended to refurbish the
second building as office accommodation, amounting to 30,000 sq ft, and to put
those additional units on the market in September 1990. Those two buildings
were known as The Salons. The units in phase 1 were, as all agree, the most
relevant comparables for the valuation of the remainder of the site.
Sapcote drew
up plans for 37 units of newly built office accommodation on the remainder of
the site, with parking space for 123 cars on the ground floor and in the
basement. They obtained planning permission and in September 1989 the property
was advertised for sale in the Estates Gazette with an asking price of
£2.5m. Sapcote agreed to sell to a company called Norquest Ltd in October 1989
for £2.375m.
There then
appeared another company, Churchill Property & Finance Group plc. A
question was raised at the trial as to whether there was a connection between
Norquest and Churchill, but it was not pursued and there was no finding either
way on that. Churchill owned 65% of Buckingham Finance & Property Ltd.
Lionhill, the eventual purchasers with whom we are concerned, were owned as to
50% by Churchill, 25% by Buckingham and 25% by a Mr Tim Challoner.
On November 2
1989 Norquest agreed to sell the property to Buckingham for £3.375m, which
would provide Norquest with a profit of £1m after two months, with completion
on November 30. A week later, Buckingham agreed to sell to their associated
company, Lionhill, for £3.7m, again with completion on November 30. Neither
sale was completed on the due date, or until March 12 1990 when Nykredit lent
£2.45m to Lionhill on the basis of Erdman’s valuation of £3.5m.
Method of
valuation
All are agreed
that a residual valuation is the appropriate method for a site on which
development is to be carried out by the purchaser. The first step is to
calculate the value of the property when developed. That can be done by taking
the rental value and capitalising it with the aid of a figure for the required
yield; or one can proceed direct to the anticipated sale value. In either case
the figure is in pounds per sq ft and is converted to the gross development
value of the whole site by multiplying with the gross, or gross internal, area.
From the
figure thus ascertained there are deducted the costs of development. These are
mainly the construction costs, but others such as finance are included. There
is also deducted a figure for the developer’s profit. What remains is the
residual land value, that is to say, the value of the site before development.
To the
uninitiated what is remarkable about this method of calculation is its
sensitivity to variables. Thus in comparing two examples that were put before
us, one finds that the gross development value of one exceeded the other by
17%; the totals of costs and profit were nearly equal; yet the residual land
value of one exceeded the other by 114%.
There was
evidence, which the judge accepted, that careful and skilled valuers did not
inevitably arrive at precisely the same answer. If a given figure is taken as
the true value, the range within which a valuer could arrive at some different
amount without negligence was plus or minus 15%. In the light of the
sensitivity of the calculation I do not find that at all surprising.
Rival
valuations
There were six
valuations before the court in one form or another, as follows:
(i) Henry
Berney were engaged by Churchill in October 1989. They arrived at a figure
of £3.7m. (That, it will be remembered, was the price at which Lionhill agreed
to buy from the associated Buckingham in November.)
(ii) Clive
Lewis, by Mr Kevin Powell [frics],
valued the property in December 1989 for Allied Dunbar, who were at that time
offering to lend money to Churchill. Their figure was £1,470,532. Their reward
for this result (which with the forbidden spectacles of hindsight was the best)
was to be sued by Lionhill in the High Court for negligence, presumably on the
ground that Allied Dunbar had been dissuaded from lending Churchill (or
Lionhill) any money.
(iii) Fletcher
King acted for the liability insurers of Clive Lewis. In October 1990 they
arrived at a value of £2,059,962 as at December 1989.
(iv) Edward
Erdman in March 1990, for Nykredit, their precise figure was £3,530,586.
(v) Richard
Ellis were engaged to give expert evidence on behalf of Nykredit. Their
valuation was prepared in December 1990 by Mr Timothy Crossley-Smith [arics] and was adopted by Mr Kenneth
Caesar [frics], who gave
evidence. Their figure was £1,650,628 as at March 1990.
(vi) Edward
Symmons were engaged by Erdman to give expert evidence. Then Mr Christopher
Honeywill [frics, fsva], in
November 1992, valued the property at £2,949,320 in March 1990.
There was thus
a wide range of figures before the court, from £1.47m to £3.7m. As Mr Michael
Briggs QC for Nykredit submits, it is possible to divide the opinions into two
groups of three, as follows:
|
Optimists |
|
Pessimists |
|
|
Henry Berney |
£3.7m |
Fletcher King |
£2.06m |
|
Erdman |
£3.5m |
Richard Ellis |
£1.65m |
|
Edward Symmons |
£2.9m |
Clive Lewis |
£1.47m |
But that is
not the end of the analysis of the figures; it is scarcely the beginning. For
good or ill, five out of the six valuers have supplied the input figures for
their calculations. The scope for cross-examination was thus hugely enlarged —
who could resist the temptation? The point was neatly illustrated by two
further calculations which have been made. One took for each input figure, the
highest for that figure of any of the five experts, and assembled all the
figures so chosen into one calculation; another did the same choosing the
lowest figures. The result was a high value of £4,734,422 and a low value of
£65,666. Which, as Euclid would say, is absurd.
Erdman’s
procedure
Nykredit
issued their standard letter of instruction. It said that the property was
being considered as security for a mortgage loan. It asked for an open market
valuation and a report with comments on, among other things, the property’s
description, the development’s potential saleability and the estimated
development cost contained in the proposal. Erdman had already received an
outline proposal for the development, a copy of the Henry Berney valuation,
Lionhill’s projected cash flow, the indicative order of costs prepared by Steel
Morgan Partnership and a copy of the planning consent and attached plans. The
plans may not have been complete, but Erdman did know that the proposed
development included a basement.
The valuation
was prepared by Mr Nicholas Moss [arics]
of Erdman with the assistance of Mr Lee Lapham. It cannot be doubted that their
work was deficient. In the first place they failed to inspect the site, or to
tell Nykredit that they had not done so. They had been provided with a contact
number by Nykredit; when Mr Moss arrived, he found the site locked and boarded
up, and did not gain access. So he failed to detect that there was no basement
in the existing building.
Second, the
Erdman report misunderstood the basis of the Steel Morgan cost figures. It was
reported that they were based on £56 per sq ft, which was said to reflect a
basic specification. Erdman expressed the view that a better specification
would be more saleable, and they allowed £75 per sq ft. But Steel Morgan had
allowed for other costs which brought their total up to that figure.
Third, Erdman
failed to research what is called the site history, that is to say (for present
purposes) recent transactions in the property and in particular the sale by
Sapcote to Norquest in October 1989 for £2.375m. They should have uncovered
that figure, with the aid of the solicitors’ report on title, reported it to
their clients Nykredit, and used it to check their own valuation. They might
also have discovered the advertisement in the Estates Gazette for £2.5m
in September.
Fourth, Erdman
failed to research, or at any rate pay adequate regard to the evidence of,
demand for office accommodation in East Acton. It would seem that Erdman knew
of sales at The Salons for £150 per sq ft. Seeing that the offices at The
Salons were refurbished and not new, and were not provided with secure
car-parking space, they thought it right to add a premium of £55 for superior
accommodation, arriving at a figure of £205 per sq ft. But information which
was available to Mr Lapham showed that there had been no sale at The Salons
since one in November at £139, that the offices had been on the market since
January 1989, and that one-third of them were still unsold. Refurbishment of
the second phase of The Salons had been postponed. Other smaller office
properties were on the market but no sales were recorded. Erdman should have
reported this information to their clients, as relevant to the likely
saleability of the proposed new development.
Fifth, Erdman
relied on a prediction which they made, along with many others, that interest
rates would soon fall and that strength would then return to the property
market. Base rate had been at 15% since November 1989 and was expected to fall.
(It did not in fact fall until October 1990.) The reliance by Erdman on this
prediction was found by the judge to be an error. He concluded that the task of
the valuer was to assume that the development was completed at the date of
valuation and to value it at that date without making any prediction about
market conditions in the future. It was for the client to form his own view
about the future if he wished to do so.
That last
conclusion of the judge was challenged in this court, and I shall have to
return to it. But in other respects it is, as I have said, clear that the work
on the Erdman valuation was deficient, and indeed negligent. That by itself may
not be enough to give Nykredit a remedy. It is said for Erdman that if they
arrived at a value which was within the range of figures that might be reported
by a valuer exercising reasonable skill and care, then it matters not whether
they were in fact negligent. Nykredit challenge that submission. They say that
they can recover for the negligence of Erdman even if the Erdman value was
within that range. I would first consider whether or not it was.
Valuation
evidence
Expert
evidence was given by Mr Caesar of Richard Ellis and Mr Honeywill of Edward
Symmons. There was also oral evidence from Mr Powell of Clive Lewis, who to my
mind was acting in the role of an expert, and from Mr Moss himself of Erdman.
The valuations of Henry Berney and Fletcher King were before the court in
written form. Mr Edmund Lawson QC for Erdman launched a skilled and prolonged
attack upon the evidence of Mr Caesar which was by no means unsuccessful,
although I do not think that he went as far as to suggest deliberate falsehood.
The judge said:
I am
satisfied Mr Caesar is an honest man who did his best in difficult
circumstances to assist the court.
The attack was
renewed in this court; and we have to consider whether the doctrine of Lord
Thankerton in Watt (or Thomas) v Thomas [1947] AC 484 at p487
applies to expert witnesses. Fortunately the answer is ready to hand in the
judgment of Brandon LJ in Joyce v Yeomans [1981] 1 WRL 549 at
p556:
… even when
dealing with expert witnesses, a trial judge has an advantage over an appellate
court in assessing the value, the reliability and the impressiveness of the
evidence given by experts called on either side …
I do not
think that the authorities on the right of an appellate court to interfere with
the findings of fact of a trial judge based on witnesses of simple fact are
entirely applicable to cases where the finding is based on expert evidence, but
I certainly would not go to the other extreme and say that the trial judge has no
advantage over an appellate court because the witnesses are expert. I think he
has certain advantages — not perhaps so great as those applicable where
witnesses are witnesses of fact, but nevertheless significant advantages which
an appellate court ought not to ignore.
For my part, I
was very conscious when we were examining the evidence of Mr Caesar that I
would be better able to judge if I had been present in court at the time. But
the very considerable impact of Mr Lawson’s cross-examination made me wonder
how reliable Mr Caesar’s evidence was. In the event Mr Briggs for Nykredit did
not present the case to us as simply a contest between the credibility of two
expert witnesses; and I think that he was right not to do so.
Mr Michael de
Navarro QC, who now appears for Erdman, submits that a critical point in the
valuation exercise is the similarity of the gross development values for all
except Richard Ellis (Mr Caesar). The sale value in pounds per sq ft on gross
internal measurement was as follows:
|
|
|
£ |
|
|
Henry Berney |
264 |
|
|
Clive Lewis |
201 |
|
|
Edward Erdman |
205 |
|
|
Fletcher King |
203 |
|
|
Edward Symmons |
200 |
It is said that
only Mr Caesar is out of line, at £175.
It seems to me
that one must beware of extracting individual figures from the valuations for
comparison, instead of comparing the bottom lines. If one extracts individual
figures, one can end up with the absurd result that the value varies from £4.7m
to £65,666. I prefer the view that each calculation must be judged as a whole.
As Mr Briggs points out, a valuer may have adopted the figure that he did for
sale value because he felt that the development would need to be carried out to
a high standard, in order to attract demand and thus there would be high
construction costs. Clive Lewis and Fletcher King each had construction costs
which were significantly higher than Mr Caesar, so that between them they ended
up forming the group of three pessimists. Or a valuer might choose a high sale
value but recognise that it would take some time for sales to be achieved, thus
increasing finance costs. That may have been what Clive Lewis did. So I reject
Mr de Navarro’s argument that Mr Caesar was, overall, out of line with the
other five valuers.
The other
major point of attack was on the judge’s conclusion that Erdman were wrong to
allow their valuation to be influenced by their belief that interest rates
would come down. Mr Honeywill had also relied on his own prediction to the same
effect. We examined at some length the evidence of Mr Caesar and Mr Honeywill
as to whether it was right for a valuer to take into account such a prediction.
Mr Caesar’s evidence on the topic was none too clear, but Mr Honeywill (who was
called by Erdman), in my view, accepted in plain terms that it was wrong. I
reject the attempt to explain away his evidence on that point and find no
reason to disagree with the judge’s conclusion to that effect.
The exact
impact of the point needs consideration. The golden bubble of the market in
office property was ceasing to grow as fast as it had in the past; the annual
rate of growth was declining. That may have resulted from an actual fall in
prices, or else because they ceased to rise. Mr Caesar was asked if the market
had gone off the boil a bit. He replied: ‘At or about the end of 1989 there
were signs in some sectors it may have plateaued’.
If purchasers
thought that interest rates would fall in the near future, and that demand
would rise in consequence and if they were prepared to act on that belief by
paying higher prices today, that would, in my judgment, be a proper matter to
take into account. It is a reflection of what the Master of the Rolls said in
the Banque Bruxelles case at p7:
The belief
among buyers and sellers that prices are likely to move upwards or downwards
may have an effect on current prices, and to that extent such belief may be
reflected by V in his valuation. But his concern is with current value only. He
is not asked to predict what will happen in future.
One should
notice that it is current prices which are affected in this way. Perhaps I may
be allowed to quote what I said in a case about wheat, Lusiograin Comercio
International de Cereas Ltda v Bunge AG [1986] 2 Lloyd’s Rep 654 at
p663:
The market
price of today is what the majority of well-informed people believe the market price
will be tomorrow.
On the
evidence we are not here concerned with the effect on current prices of
a possible future rise in interest rates; we are concerned with what some
people (but not necessarily everybody) thought would be the level of interest rates,
and consequently of prices, in the future. On the evidence of Mr Honeywill I
agree with the judge, that Erdman were wrong to take it into account.
There were
other criticisms of the judge’s reasoning and his conclusions. But overall I am
satisfied that he was entitled to decide, as he did, that the value of the site
in March 1990 was £2m, or at most £2.375m; that Erdman’s figure of £3.5m was
outside the range of a careful and skilled valuer and that Nykredit would not
have lent any money if Erdman had given the highest non-negligent valuation. I
would dismiss this appeal.
Beldam LJ
agreed and did not add anything.
Also agreeing,
Peter Gibson LJ said: I could content myself with
careful judgment made any error whatever. But that would do less than justice
to the contentions attractively advanced by Mr de Navarro QC for the appellants
(‘Erdman’) and to the excellent argument in reply of Mr Briggs QC for the
respondents (‘Nykredit’) and in deference to them I add a judgment of my own.
Despite the
extravagant length of the notice of appeal (running to 40 paras), this appeal
has been presented on the single ground that the judge erred in holding that
Erdman’s valuation of the site at £3.5m was outside the range of valuations to
which a reasonably competent valuer could properly have come. It is not
suggested that the judge erred in law in his approach and Mr de Navarro
properly recognised the difficulty facing him in seeking to overturn the
decision of the judge on a question of fact. But he presented the case as, in
effect, a dispute between two expert witnesses — Mr Caesar for Nykredit and Mr
Honeywill for Erdman — and it may be a little easier for this court to reverse
the finding of a trial judge which is based on expert evidence than a finding
based on the evidence of witnesses of fact. Mr de Navarro made full use of the
material available to him, particularly from passages in the cross-examination
of Mr Caesar, to cast serious doubt on the credibility and objectivity of Mr
Caesar. Nevertheless, I note that the judge was fully alive to the deficiencies
of Mr Caesar as a witness, saying of him that: ‘in the outcome [of the
cross-examination] he did not do well’, that: ‘At times he became diffident,
defensive and even evasive in his answers’ and the judge said that he
approached Mr Caesar’s evidence in support of the gross development value
earlier suggested by his colleague, Mr Crossley-Smith, ‘with some degree of
caution’. I cannot treat as insignificant the advantage enjoyed by the judge
over this court of having seen and heard the expert witnesses give evidence.
Further, as
the judge found, there was no issue between Mr Caesar and Mr Honeywill on the
professional disciplines that Erdman should have applied when valuing the site
for Nykredit. Mr de Navarro criticised the judge for this finding and in
particular he submitted that the experts were in disagreement on the relevance
of expectations as to future movements in interest rates. Erdman had relied on
their own prediction that interest rates would fall, thereby, as they believed,
stimulating demand for the new development. Mr Honeywill’s own definition of
‘gross development value’ in a residual land valuation was the value of the
proposed development as though completed at the time of the valuation and that
accords with Mr Caesar’s evidence in para 4.02 of his first report, on which he
was not cross-examined:
In assessing
the gross development value, it is assumed that the development is completed at
the valuation date, so that the valuer is not required to make assumptions or
predictions about market conditions months or years in the future when it is
anticipated that the development will be completed.
Mr Honeywill,
initially in his cross-examination, accepted that paragraph as correct, later
resiled from it but eventually said that he would not rely on speculations
about future interest rates because it would be inappropriate in a valuer. I
did not find convincing Mr de Navarro’s explanation that Mr Honeywill was
confused, or that he was confining his agreement with Mr Caesar to the effect
on the developer’s costs of future interest rate movements as distinct from
demand for the completed development. Nor do I accept Mr de Navarro’s
submission that Mr Caesar’s firm relied on their expectations about the future
when making a valuation in a report on another development known as Rio
Edgware. On the contrary, as Mr Briggs pointed out, Richard Ellis had carefully
excluded speculation about the future when making their valuation, but
correctly had drawn their client’s attention to future expectations in their
report. Mr Moss frankly conceded that his view that there would be
owner/occupier demand was based on the assumption that interest rates would
fall and he accepted that it was inappropriate for a valuer to proceed on that
assumption when assessing demand. To my mind, therefore, it is plain on the
evidence that it is wrong to take speculations about the future movement of
interest rates into account on a valuation, both in relation to demand and in
relation to developer’s costs.
I do not
regard the remarks of Sir Thomas Bingham MR in the Banque Bruxelles
case, which Staughton LJ has cited, as in any way inconsistent with this view.
If buyers and sellers are in their purchases and sales giving actual effect to
their optimistic or pessimistic expectations so as to create comparables, to
that extent the valuer may reflect these expectations in his valuation. But the
valuer’s concern is with current value and not with predictions as to the
future. I have also to say that I have reservations about the applicability of
Staughton LJ’s comment on market value which he has cited from the Lusiograin
(supra) case to a case like the present, though like every good aphorism
it contains a kernel of general truth. Whatever may be the position in relation
to fungibles in the commodities market, the valuer is concerned to ascertain
what a purchaser would pay today to obtain the property in question. To achieve
that purchase, the purchaser need only pay the minimum necessary to outbid
other purchasers. That is the best price, even if the purchaser thinks the
market will go higher tomorrow. No doubt many, if not most, purchasers will
expect to make a profit by the price going higher tomorrow. But the valuer is
only concerned with today’s best price.
Thus far I
have concentrated on whether Mr Caesar and Mr Honeywill were in dispute on
basic principles. They undoubtedly were in dispute on the application of those
principles, in particular in relation to the figure for the gross development
value. But, in my judgment, it is not right to portray the case as one turning
only or primarily on whether the judge should have preferred the evidence of Mr
Caesar or that of Mr Honeywill. Their evidence was not the only evidence
material to the valuation, as the judge made clear. In accepting a figure of
the order of £175 per sq ft, as suggested by Mr Crossley-Smith and supported by
Mr Caesar, to be the appropriate basis for calculating the gross development
value, the judge found corroboration in Mr Powell’s figures when adjusted to
correct errors, and more speculatively, as the judge acknowledged, in the
Fletcher King figures when similarly adjusted (as he found was reasonable,
given that the Fletcher King report was one on Mr Powell’s valuation). But in
any event, in my opinion, it is dangerous to take individual constituents of
the residual land value in isolation. The residual land values found by Mr
Powell, Fletcher King and Mr Crossley-Smith (and Mr Caesar) plainly form a
group relatively close to each other, whereas those found by Henry Berney,
Erdman and Mr Honeywill equally plainly form another group separated from the
first by a substantial amount.
In my
judgment, the judge was entitled to find on the evidence that the different
perception of demand for the developed site was what distinguished the one
group from the other and that this critically affected both the gross
development value and the costs of the development. There was much evidence as
to how pessimistic or optimistic expectations of demand affect the costs of the
developer. For example, the pessimist would include a figure of 20% (of the
development costs and residual land value) for the developer’s profit, the
optimist 15%. We were told that Lionhill itself worked on figures of 20% (in
agreement with Mr Powell and Mr Caesar). There was also ample evidence for him
to find that not only had Erdman failed to research adequately the demand for
office accommodation in the B1 use class in the Acton area (contrary to
Erdman’s express instruction from Nykredit to report on the potential
saleability of the completed development), but also that ‘the demand for the
new development would be poor, or at best a matter of speculation’. It is clear
on the evidence that Erdman’s errors were of a nature that indicated their
valuation was too high. For example, Erdman, by not researching the site
history, ignored the price achieved on the last arm’s length completed sale of the
site in October 1989, that is to say £2.375m. It also misconceived the true
basis upon which Steel Morgan had costed the project for the developer. It took
the figure of £56 per sq ft plus a figure for the basement car park (which we
were told would add about £10 per sq ft), but overlooked that part of the
estimate which, unknown to it, brought Steel Morgan’s figures up to £75 per sq
ft. But Erdman thought that buildings with a better specification than that
provided for by Steel Morgan would be more saleable and so increased what they
thought were the Steel Morgan costings by a further £9 per sq ft to £75 per sq
ft, whereas on that reasoning the true figure would be £84 per sq ft.
In short, in
my judgment, the judge was entitled on the evidence before him to reach the
conclusion that the value of the site at the relevant date was not more than
£2m or the £2.375m sale price achieved in October 1989. These figures are so
far below the £3,530,586 valuation put on the site by Erdman that there can be
no doubt that the Erdman valuation was well outside the range of valuations
which a competent valuer might reasonably have reached. The judge was content
to accept Mr Honeywill’s evidence that that range would be up to 15% either
side of the correct valuation. It is one of the oddities of Erdman’s case that
Erdman’s valuation was in fact more than 15% above the valuation of £2,949,320
which was made by Mr Honeywill and on which Erdman chiefly relied.
Mr de Navarro
did not dispute the judge’s holding that if Erdman had reported that the value
of the site was £2.375m or below, Nykredit would have turned down the
application for a loan.
That is
sufficient to dispose of this appeal. But for completeness I would add that I
accept Mr Briggs’ submission that on another ground this appeal could not
succeed. The judge found that the contract between Nykredit and Erdman based on
the letter of instruction dated February 22 1990 included terms that Erdman was
to inspect the site both inside and out and they were to include in their
report a commentary upon the realism or otherwise of the developer’s costings.
Erdman failed to inspect the interior of the site and so failed to detect the
absence of a basement and could not in this respect provide a proper commentary
on the realism of the developer’s costs. The judge’s conclusion was that had
Erdman reported the absence of a basement no loan would have been made.
Erdman’s only challenge to this conclusion was to say that the judge should
have found that the absence of a basement would not involve the developer in
substantial additional costs. But while there was some evidence to that effect
there was also evidence to support the judge’s finding that substantial extra
costs would have been incurred (see, for example, Steel Morgan’s letter of May
25 1990 in which it was said that the basement would be very expensive to
provide) and in addition that there would have been a delay because of planning
considerations. It was on this basis that the judge concluded that Nykredit
would not have made the loan. In my judgment therefore on this ground, too,
this appeal fails.
For these
reasons I also would dismiss this appeal.
Appeal
dismissed.
